Welcome to our second quarterly Markets & Economic Summary of 2026 in which we look back on the performance of markets and economies around the world during the first three months of 2026 and what we can expect going forward.
Markets
The first quarter of 2026, at the beginning, saw the continued steady growth of global stock markets that began in 2025, driven mostly by the on-going enthusiasm for Artificial Intelligence (AI), strong company earnings & profits amongst the world’s largest companies, the optimism for further interest rate cuts and a reduction in inflation for 2026. The resilience shown in the markets was strong considering there were still geopolitical uncertainties such as the ongoing topics of Trump’s tariff regimes, the US-China trade tensions and the worry that a ‘bubble’ was forming in AI. This is best seen through the stock market indices, with the FTSE 100 (UK) reaching and surpassing 10,000 for the first time, and the S&P 500 (US) reaching a record high of almost 7,000 (6,978).
The S&P 500 performance was mostly attributable to the ‘Magnificent 7’ technology stocks, although there has continued to be a broadening out of returns across the index. The S&P 500 was not the best performing index of the quarter and for a UK investor thereturns would have been lower in sterling terms as the dollar continued its weakening from 2025. Other markets’ performance, such as the FTSE 100 and Euro STOXX 600 weremore attributable to the macro-economic climate, such as increased spending on defence (target of 5% of GDP) by European Union (EU) and NATO countries, weakening inflation, and interest rates being far lower than they were at the end of 2024/beginning of 2025. Asia, however, was like the US in that the returns were largely dependent on technology stocks.
Index
March Performance %
Year to Date Performance %
One Year Performance %
FTSE 100 (UK)
-6.73
4.03
19.87
S&P 500 (US)
-5.10
-4.81
15.90
Euro STOXX 600 (Europe)
-8.00
-0.05
10.21
Nikkei 225 (Japan)
-13.23
3.68
50.85
Hang Seng (China)
-6.92
-3.97
8.99
Gold
-11.94
7.62
46.21
By the end of the first quarter, much of this hard work by the financial markets had been undone due to the US’ military operations in Iran. The FTSE 100 dropped by more than 6% from its high of 10,900 in February (although it is still positive year to date), the S&P 500 dropped around 5% from its February highs, and the Euro STOXX 600 (Europe) also dropped by around 8% from its February highs. The main driver behind these falls were the increase in oil prices, with oil prices hovering around the $100 mark and looking a threat to increase further. Even the standout asset of 2025, gold, has seen a drop of more than 10% in its price. This is mostly due to fears that a prolonged conflict could ramp up inflation once again and potentially interest rates, which would mean investors naturally shift their monies into bonds to secure a guaranteed return amongst the uncertainty of the stock market, and in doing so taking the profit gold accumulated them over the course of 2025.
Economics
Firstly, before addressing the issues caused by the conflict between the US and Iran on global financial markets and economies, it is important to note that in the US, the UK, Europe, Asia and Japan, that the fundamentals underpinning their respective economies are still currently strong. For example, company earnings are still high, many companies globally have strong profits and cash generation, interest rates are continuing to comedown and inflation is also fairly steady.
However, should the conflict be prolonged or become a wider regional conflict then problems such as an increase in inflation once again could become exacerbated. What began as a solitary conflict between the two countries, quickly spread with Iran striking the United Arab Emirates, Saudi Arabia, and the UK military base in Cyprus. There is now a possibility it could become a wider conflict with the Houthis becoming more involved with attacks in the Red Sea. Iran continues to cause global supply issues withregards tooil by keeping the Strait of Hormuz (20% of the world’s oil passes through here) almost closed to ships and tankers, albeit it is allowing some countries’ tankers to pass through for a cost.
This reduction in global oil supply has seen oil prices massively increase whichcauses costs to increase for manufacturing companies, airlines, fuel companies andmany more industries. This, of course, passes through to us as consumers in the form of increased fuel prices, flight prices and a general reduction in our disposable income to spend in our economy on goods and services. All of which is what happened in 2022, to a much higher level, which also had a huge effect on company earnings and ultimately global stock markets. This time thoughthe conflict is not expected to be prolonged to the level of the Russia/Ukraine war, and so there is hope that this will just be a blip for 2026 overall.
In the UK, the Bank of England (BoE) have recently held rates steady once again at 3.75%, a cautious move due to the potential of increased inflation through higher energy price sat present. Although economic growth in the country was slightly positive in Q1 2026, the Office for National Statistics (ONS) did unfortunately lower their growth expectations for 2026 to anywhere between 0.9% to 1.4%. A prolonged conflict in Iran will not help this outlook, especially in addition to higher costs for businesses and individuals as a result of the fiscal policy from the Labour Government. Thankfully for the FTSE 100, the UK’s actual economic climate does not massively influence the performance as most of the index’s earnings come from overseas. Sadly though, the UK economic climate does affect individuals’ quality of living and with higher costs and more taxation, this falls slightly.
In contrast to this, the US outlook for economic growth stands at 2.1% (albeit down fromprevious 2.7% targets). When you combine this with the fact the country has the ‘Magnificent 7’ and their incredible earnings, most of the S&P 500 companies being the largest on the planet in their respective industries, the US being a net-exporter of oil and Trump slowly being more generous and realistic with his tariff regime, then the prospects for investors remain strong, and quality of life for Americans should be good. Fuel prices have still spiked slightly due to the war, despite the US being a net-exporter. Like the UK, the US has also held their interest rates steady for the time being at 3.75%.
In Europe, specifically EU nations under control of the European Central bank (ECB), inflation was largely under control prior to the conflict, at around the ECB’s 2% target, and interest rates at 2% as well. The Eurozone had economic growth of 0.4% in the first quarter of 2026, mostly driven by Ireland, Spain and Lithuania. The EU continues with its increased fiscal stimulus into infrastructure, utilities and defence, as part of the €71bn injection into its economies. Europe, however, is more dependent on oil and energy from the Middle East and so the conflict has increased energy prices substantially, putting further strain on businesses and individuals just as inflation had subsided.
Asia is feeling the effects of the Middle East conflict more than Europe since it is far more dependent on countries in the region to provide its oil. Despite this, China’s economy had seen more industrial output (rose 6.3%), increased foreign trade, and continued investment into technology, however, its domestic consumption remains subdued and foreign direct investment has declined. Analysts have set 2026 economic growth forecasts for the country at 4.5%, down from the original 5% target.
Elsewhere in Asia, in particular South Korea, the story is more positive with its stock markets up more than 100% over a one-year period. Although like most countries at present, it has seen a recent large fall. The main drivers for the country’s recent success are increased government spending on infrastructure, export-oriented industrialisation, and AI & technology.
Outlook for the rest of 2026
Taking all of the above into account, the expectations from analysts and global investorsis that the Iran conflict should not be prolonged or cause a repeat of disruption to the economy at the level that we saw in 2022. At the time of writing, the target index price for the S&P 500 and FTSE 100 by the end of 2026 are, respectively, 7,500 and 10,900.
Global economic growth is estimated to be 3.1% for 2026 with the main factors attributed to further interest rate cuts by central banks, continued increased government spending and further adoption globally of AI and similar advanced technology. Inflation is largely on track to fall for most regions, however, given the current conflict this could well be driven higher which would necessitate the need for central banks to be more cautious with rate cutting. Prior to the conflict, the US Federal Reserve (Fed) was only predicted to cut rates twice, which is likely to still be the case.
In terms of the financial markets, in the US technology companies’ earnings are stillexpected to keep growing as demand for AI keeps increasing. However, Price-to-Earnings(P/E) ratios for these companies still remain elevated, with investment into US stocks ingeneral commanding a premium over UK, European and Asian stocks. As a result of this, many investors globally have shifted their monies into Asian and Emerging Markets(EM) where the weakening of the US dollar has helped companies in those regions to reducetheir cost of servicing debt and increase earnings from exports
One such country in Asia that is expected for a positive 2026 is South Korea, driven by an AI semi-conductor boom, shareholder friendly corporate reforms and strong earnings growth. The MSCI Korea Index is forecasted to grow by 30%, with a government spending increase supporting a 2% GDP growth.
In Europe, despite the spike in energy prices from the Iran conflict, stocks are still expected to deliver positive returns. The ECB expects EU economic growth of around 1.2%, supported by fiscal easing and a significant German investment plan. Company earnings remain strong and cash generative and there is likely to be a sector rotation from financials into other areas such as automobiles as interest rates continue to come down. Although financials are still forecast for positive returns with banks still showing increased loan growth, high margins and shareholder payouts.
One worry for the financials sector, not just in Europe but globally, is that of the private credit market merging more with asset-backed securities. With non-bank lenders providing financing secured by cash-flow collateral as opposed to company cash flows. Typical assets used as security are residential mortgages, consumer loans, intellectualproperty etc. This is becoming more of a concern with memory casting back to the global 2008 financial crash where such investments collapsed due to defaults on mortgages and loans. This is an area to keep an eye on.
In the UK it is like to be a year of steady growth, with GDP only expected to be a modest 1.2%, although inflation is expected to drop below 3% and settle near the 2% target by mid-2026. Businesses are still struggling with increased costs of employment from National Minimum Wage increases, increased National Insurance Costs, and now the spike in energy prices (which were already among the highest in the world). But as mentioned earlier, most of the FTSE 100 earnings come from overseas, so there is usually a contrast between how the actual UK economy is doing vs stock market performance. Unemployment is predicted to peak at around 5.5%, which should help reduce wage growth and ultimately help ease inflation.
With regards to the fixed income markets, income generation remains strong withexpected positive returns from both government and corporate bonds as yields continue to settle. Corporate bonds specifically are being supported by solid fundamentals fromthecompanies that issue them. A concern however is that of elevated governmentdeficits and debt supply posing a risk to long-term rate expectations.
As always, a well-diversified portfolio remains the best defence against uncertainty, helping investors capture upside potential while protecting against inflation, inevitable market corrections, and shifting global sentiment.
If you’re an existing client and want to discuss any of the points raised in this article or want further assistance, please contact your usual Fogwill & Jones adviser who will be happy to help you. If you are not an exisiting client, but are interested in using our advising services, please get in touch below.
Simon Briggs
Chartered Financial Planner, Director & Compliance Manager
Liam Burnett
Investment Analyst